Fundamentals is our monthly review of global oil data, this is the March 2019 edition.
Our Q1 19 crude oil balances are showing a 0.2 mb/d build, slightly higher than last month’s forecast by 0.1 mb/d, mainly as runs have come in weaker than expected amid rising unplanned outages. Regardless, this is a bullish print, with Q1 builds in the previous five years having averaged 0.8 mb/d. However, our Q1 19 liquids balances have tightened by 0.1 mb/d since last month, to a 0.8 mb/d draw.
Lower refinery runs and poor initial compliance with OPEC cuts pushed crude production higher than expected by 0.1 mb/d from last month, with Nigeria and Iraq the main culprits behind higher January production. Iran managed to export more than expected in January and February as Japan and South Korea frontloaded purchases prior to the sanctions waiver deadline in May, while returning production at the Sharara field in Libya over March is adding to Q1 19 OPEC supply. This is being somewhat counterbalanced by a drop in non-OPEC production as Mexican output shocked to the downside in January and freeze-offs in the US also stymied growth.
Moving into Q2 19 and our crude oil balance has tightened, now showing draws of 0.9 mb/d, vs 0.8 mb/d forecast last month. Despite weaker runs East of Suez due to strong maintenance programmes in China, OPEC cuts (and Venezuelan loadings) are to be deeper (-0.2 mb/d m/m) and non-OPEC supply is forecast slightly lower. The liquids balance has also tightened, by 0.2 mb/d, to a 0.6 mb/d draw due to higher than last month’s forecast turnarounds.
Saudi Arabia is leading from the front with OPEC cuts, with the country targeting 9.8 mb/d of production in April. Small rises in Saudi production in May and June will be largely to fuel increased domestic demand from the power sector. Venezuela continues to struggle with finding cash buyers for its oil, with the bulk of exports being delivered to China and Russia as debt payments, which is restricting exports. We have reduced our forecasts for Venezuelan output by 0.3 mb/d to 0.74 mb/d across Q2 19, given there is no obvious breakthrough in regime change on the horizon. US efforts to oust Maduro are taking priority over coming down harder on Iran in the near-term, increasing the likelihood of the US administration extending some of the Iranian sanctions waivers at or near existing levels. Waivers for southern European and likely Japanese buyers will be discontinued, although the largest customers—China, India, South Korea and Turkey—are set to get extensions, totalling around a combined 1 mb/d. So, while our forecast for Venezuela has deteriorated, we expect Iranian production to be higher by 0.25 mb/d in Q2 19 at 2.53 mb/d versus our previous forecast, partly countering the drop from the Latin American country.
Q3 19 crude balances look the most constructive we have seen in years, with draws of 1.9 mb/d unchanged from last month’s forecast. Our liquids balances are forecast to draw by 0.4 mb/d, also the same as last month’s prediction. We are expecting builds in both crude and liquids over Q4 19 driven by a ramp-up in US and Brazilian crude production and the building of distillates stocks.
Our balances currently include returning OPEC barrels in H2 19 (i.e. we do not expect the current deal to be extended) as well as expectations that non-OPEC supplies will grow in Q3 19. Yet despite this, we see a sizable short. We are anticipating refiners to run harder in H2 19—higher by 1.8 mb/d y/y—in order to build distillate stocks ahead of increased shipping demand under new IMO regulations. Current distillate stock levels are insufficient to meet the impending 2 mb/d of additional MGO demand (as well as fill pipes and tanks), with stocks sitting well below five-year averages in Europe and North America. Yield shifts to maximise distillate output will be challenging amid a lightening, naphtha-rich crude slate as more production from the US is pushed into the international market. This will be even more problematic if OPEC cuts are extended into H2 19, as medium and heavy sour crude availability will be kept at bay along with the distillates that are yielded from it. New Permian pipelines will support US crude output growth, while Canadian production is set to recover. One risk to our crude balance in H2 19 is if there is simply not enough crude available as refineries ramp up to build stocks and the light crudes that are obtainable are not delivering enough of the right molecules.